The pros and cons of negative gearing

The Gold Coast is a fantastic place to invest in property, and the current state of tourism and employment in the region means that people are flooding in for a reason.

Investors are always looking for ways to get ahead, however, and negative gearing is a popular option. Real estate in Surfers Paradise could see a boost on the back of proposed changes to the policy.

While discussions are underway that will decide how negative gearing operates in Australia for the near future, here is a look at the good and bad of what it means:

The good

Negative gearing itself is when the income that a property produces is exceeded by the costs of actually owning it, including mortgage repayments.

The process of negative gearing makes adding value to your property portfolio more accessible because of available tax deductions. ANZ suggests that some of these deductions could come from revenues, such as money needed for body corporate fees and property maintenance, or capital items such as white goods.

Two policies being debated at present will open up very different avenues for investors. From July 2017, whichever policy is decided upon will come into action and the face of Australian investment could change dramatically.

Both of the policies are aiming to limit the effect of negatively geared properties on the market. One is hoping that only new real estate will be eligible for negative gearing, while the other will cap the number of negatively geared investments any one body can hold and also reduce the tax deductions available.

International and domestic investors see negative gearing in the country as a great way to increase the size and value of their portfolios, and that generates revenue for the Australian economy. The CoreLogic Housing Market and Economic Update from February 2016 reports that residential real estate in the country accounts for $6.4trillion, while commercial sits at just $700billion. In fact, 52.1 per cent of all household wealth is landed in residential dwellings.

Such a significant part of the economy being boosted by investment based on negative gearing is good news, right? For such a seemingly positive factor in Australian markets, why are changes being proposed?

The bad

While negative gearing drives investment in the country, investors taking control of the property market means that prices are pushed higher and become less affordable. As available properties are snapped up by investors, there is a much more contested buying market for owner-occupied real estate.

Taking away some of the opportunities for investors to control a majority of the market could open up more affordable properties, particularly for first homebuyers. Supply of properties is an issue for keeping prices down at present as the common perception is that there are not enough patches of affordable real estate.

"Supply is acknowledged by all as critical in resolving the affordability problem," said Real Estate Institute of Australia president Neville Sanders.

"Supply is constrained by a number of longstanding challenges including regulatory and zoning constraints and cost structures including taxing of building."

Proposed changes to negative gearing will not necessarily open the market up to increased affordability, and there are other risks involved with the whole process as well. The Australian Securities and Investments Commission suggests that property investment is sound because it is not subject to the same market fluctuations as other investments.

However ANZ lists some of the risks that negatively gearing a property entails. Due to having less income than costs on the residence, investors will need to have enough capital to maintain the property and keep up with mortgage repayments and other expenses without relying on rent. Choosing the right property is also significant because buying a property that is not likely to increase in value over time will only cost the investor money and not add worthwhile value to a portfolio.

Negative gearing has both good and bad sides, and making up your mind about what to focus on in terms of property investing before July 2017 could put you ahead of your competitors.